Review the latest Weekly Headings by CIO Larry Adam.
- Winners don't always stay on top
- Having a balanced offense and defense is key
- Stay focused on the long game
This year’s men’s basketball tournament is one for the history books! Aside from the usual bracket busters and Cinderella stories that accompany college hoops in any given year, 2023 marks the first time since 1979 that a top three seed did not advance to the semifinals. In fact, there have only been three other times (2011, 2006 and 1980) in the last 44 years that a number one seed is not playing in the semifinals. While selecting a number one seed (the most winning team) in your bracket may tilt the odds in your favor, it is no guarantee of success. Upsets can and do happen. Lower seeded teams can go on spectacular runs. That’s all part of the beauty and unpredictability of the game. In many ways, the process of filling out a bracket is like investing. It requires balancing risk and reward, while maintaining discipline. Below are five important investing lessons we can learn from college hoops:
- #1 – Winners don’t always stay on top | While a number one seed in the men’s college basketball has traditionally advanced to the semifinals, their past performance doesn’t guarantee future success. Yes, the odds may work in your favor, but victory is by no means assured. This same dynamic is more profound in investing. History has shown that no single asset class has been a consistent winner year after year, just as no single asset class remains at the bottom. In the 23 years that we have run our own version of ‘bracketology’ – which uses nine broad asset classes consisting of cash, equities, fixed income and commodities – the best performing asset class (i.e., the number one seed) has only come out on top once! To illustrate, oil, the number one seed in our 2023 bracket after an impressive 56% return in the year ending February 2022, finished at the bottom this year, down 19.5%.
- #2 – Make halftime adjustments | Basketball coaches are known for making halftime adjustments to position their teams for success. These minor adjustments can often change the trajectory of the game. Similarly in investing, it is often necessary to make adjustments to account for deviations away from your desired asset allocation mix. Our bracketology results showed that the eighth seed (i.e., the worst performer) ended up being the top performer the most – winning on five separate occasions. In general, the lower the seed, the better the performance. Interestingly, riskier asset classes won the most, but often fell to the bottom the next year. That is why rebalancing is critical to maintain your target portfolio mix and dampen any unwanted volatility.
- #3 – Have a balanced offense and defense | All good athletes know that winning a game requires having a balanced offense and defense. Having a mix of both and properly executing at the right time in the game is key to a team’s success. The same analogy holds true when it comes investing – some of your portfolio assets need to play defense (i.e., minimizing losses), while others can play offense (i.e., maximizing returns). This is one of the most basic concepts of asset allocation – using a diversified mix of assets to balance risk and potential rewards. However, diversification does not guarantee against a loss. For example, 2022 proved to be a perfect storm for diversified portfolios, where the classic 60% equity/40% bond portfolio lost 16.1%. In fact, that was the biggest calendar year loss in a 60% equity/40% bond portfolio since 2008. However, after the valuation reset to higher bond yields (your defensive player) in 2022, diversified portfolios should get back on track.
- #4 – Focus on the long game | Successful teams understand that playing the full 40 minutes of the game is critical to increase their odds of winning. It’s not always easy for players to remain focused as there are plenty of distractions along the way that can veer the team off course. However, the most successful stick to their game plan and execute their strategy with perhaps a few minor adjustments along the way. This parallels nicely with investing. It’s understandable that investors can get spooked by negative headline news reports or a sudden unexpected decline in the stock market. However, having the fortitude to look through market volatility, stick to your well thought out financial plan and to stay invested for the long term remains critical to achieving investment success. In fact, studies have shown that over a twenty-year period, missing just the 20 best days in the market (which usually follow the worst days in the market) can significantly subtract from your long-term performance.
- #5 – Don’t underestimate the importance of a great coach | Proper planning is fundamental to success. John Wooden, one of the most revered college basketball coaches of all time, was best known for his meticulous planning both on and off the court. Under his guidance and leadership, he steered the UCLA Bruins to an impressive number of wins during his long career. And just as athletes benefit from having a great coach, individuals and families can benefit from having tailored financial advice from an advisor – not just on investments, but holistically on all aspects of financial decision making. Great coaches (and advisors) can also help players (and investors) think more clearly when emotions start to cloud your judgment.
View as PDF
All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.